The dollar put in a mixed performance against the majors last week. NOK, CHF, and EUR outperformed while SEK, CAD, and JPY underperformed. The greenback was helped by strong U.S. data and heightened Fed tightening expectations and that should continue this week in the lead up to the jobs reports Friday.
Strong U.S. data and hawkish Fed comments last week led to significant repricing of Fed policy. A 25 bp hike in July is nearly priced in while the odds of another 25 bp hike after that have risen to around 35%. If the U.S. data continue to come in strong this week, those odds should rise further. Furthermore, Fed easing has been pushed out to next June. Simply put, the market is finally starting to believe the Fed’s “higher for longer” message. This has boosted U.S. yields and in turn this has helped the dollar get traction. The data this week will be key for an extended rally. OF note, the U.S. 2-yaer yield traded as high as 4.93% Friday and is on track to test the March high near 5.08%, while the 10-yar yield traded a high as 3.89% Friday and is on track to test the March high near 4.09%.
The data highlight will be the June jobs report Friday. Consensus for NFP is currently 225k vs. 339k in May but the whisper number is 261k as the latest weekly claims data suggest the labor market remains robust. The unemployment rate is expected to fall a tick to 3.6%, while average hourly earnings are expected to fall a tick to 4.2% y/y. Ahead of the jobs report, ADP releasees its private sector jobs estimate Thursday and is expected at 240k vs. 278k in May. May JOLTS job openings (9.968 mln expected) and June Challenger job cuts will be reported Thursday along with weekly jobless claims. Initial claims are expected at 245k vs. 239k last week
FOMC minutes Wednesday will be important. Recall that the Fed decided to skip at the June 13-14 FOMC but signaled further tightening ahead with the hawkish shift in the Dot Plots. The minutes will be scoured for clues on what might trigger a pause rather than a skip. Since the June decision, retail sales have come in strong and weekly claims data suggest the labor market remains tight. PCE readings show inflation easing, albeit slowly. This week’s data will be very important for the July decision, though CPI and PPI next week and retail sales the week after will have a big impact too. Barring a complete collapse in the economy, it’s hard to make a case against a 25 bp hike at the July 25-26 meeting. Williams speaks Wednesday and Logan speaks Thursday.
We get key PMI readings. ISM manufacturing PMI will be reported Monday and the headline is expected at 47.2 vs. 46.9 in May. Keep an eye on employment and prices paid, which stood at 51.4 and 44.2 in May, respectively. ISM services PMI will be reported Thursday and the headline is expected at 51.3 vs. 50.3 in May. Keep an eye on employment and prices paid, which stood at 49.2 and 56.2 in May, respectively. Last week, Chicago PMI came in at 41.5 vs. 43.8 expected and 40.4 in May.
Other minor data will be reported. May construction spending will be reported Monday and is expected at 0.5% m/m vs. 1.2% in April. June auto sales will also be reported Monday and expected at a 15.30 mln annual rate vs. 15.05 mln in May. May factory orders will be reported Wednesday and are expected at 0.8% m/m vs. 0.4% in April. May trade data will be reported Thursday and is expected at -$69.0 bln vs. -$74.6 bln in April. Of note, the Atlanta Fed's GDPNow model is currently tracking 2.2% SAAR for Q2, up from 1.8% previously. Next model update comes Monday. It’s worth noting that after the upward revision in Q1 GDP growth to 2.0% SAAR, the economy has grown four straight quarters above trend at a time when the Fed wants below trend growth to bring down inflation.
Canada highlight will also be June jobs data Friday. Consensus sees 20.0k jobs created vs. -17.3k in May, with the unemployment rate expected to rise a tick to 5.3%. Canada’s economy too remains resilient despite past BOC tightening. Ahead of that, June S&P Global manufacturing PMI will be reported Tuesday. May trade data will be reported Thursday. June Ivey PMI will be reported Friday. Bank of Canada tightening expectations have ebbed slightly. WIRP suggests odds of a 25 bp hike July 12 are around 55% vs. nearly 70% at the start of last week, but is still fully priced in for September 6. Odds of another 25 bp hike after that top out near 35% October 25 vs. nearly 70% at the start of last week.
All eyes are on France right now. The situation remains fluid but it appears that the rioting may have reached a crescendo after nearly a week of violence. That said, the economic costs are mounting and come at a time when the economy was already tipping into recession. Shopping malls, supermarkets, banks, and other businesses have all been attacked or looted during the riots. With curfews in effect, there’s no doubt that activity will take a big hit. In terms of politics, it appears President Macron may be the biggest loser even as previous protests against raising the retirement age had already left him severely weakened. Stay tuned.
Otherwise, the eurozone has a quiet week. Final June manufacturing PMI will be reported Monday. Italy and Spain report for the first time and are expected at 45.3 and 47.9, respectively. If so, both would be down about half a point from May. Final services and composite PMIs will be reported Wednesday. Here too, Italy and Spain report for the first time and their composites are expected at 51.0 and 54.2, respectively. If so, both would be down a full point from May. May PPI will be reported Wednesday and is expected at -1.4% y/y vs. 1.0% in April. May retail sales will be reported Thursday and are expected at 0.2% m/m vs. flat in April.
Individual eurozone countries also report some key data. Germany reports May trade data Tuesday. Exports are expected at 0.5% m/m vs. 1.4% in April and imports are expected at -0.2% m/m vs. -0.4% in April. France and Spain report May IP Wednesday and are expected at 0.6% m/m and 0.2% m/m, respectively. Germany repots May factory orders Thursday and are expected at 1.2% m/m vs. -0.4% in April. Germany reports May IP Friday and is expected flat m/m vs. 0.3% in April. Italy reports May retail sales Friday. Germany has been the weak link in the eurozone but others are quickly being dragged down as well.
ECB tightening expectations remain steady. WIRP suggests odds of a 25 bp hike are near 90% July 27. Odds of another 25 bp hike stand near 55% September 14, rise to nearly 80% October 26, and is nearly priced in December 14. After that, no more hikes are priced in. This is noteworthy as it appears the market believes the doves even though core inflation remains uncomfortably high. ECB publishes its consumer expectations survey Wednesday. Villeroy also speaks Wednesday. Guindos and Lagarde speak Friday.
The U.K. has a quiet week. Final June manufacturing PMI will be reported Monday and final services and composite PMIs will be reported Wednesday. The economy is already slowing and the more aggressive tightening path for the Bank of England will take a toll on the economy in H2. Bloomberg consensus sees a stagnant economy in Q2 but the risks are clearly weighted to the downside.
BOE tightening expectations remain elevated. WIRP suggests another 50 bp hike is largely priced August 3, followed by 25 bp hikes September 21, November 2, and December 14 that would see the bank rate peak near 6.25%. This would represent the most aggressive tightening cycle in the majors so far in terms of absolute magnitude and yet the benefits to sterling are starting to wane. That’s because a recession is now back on the table after some earlier optimism. Update macro forecasts will come at the August meeting and will have to acknowledge the worsening backdrop. Mann speaks Friday.
Switzerland reports May CPI Monday. Headline is expected at 1.8% y/y vs. 2.2% in May. If so, it would be the lowest since January 2022 and below the 2% target. The Swiss National Bank just downshifted to a 25 bp hike in June but signaled that further tightening would be needed. President Jordan said “We are not at the end - most likely there could be more rate hikes necessary in order to bring inflation on a permanent basis below 2%.” WIRP suggest a 25 bp hike to 2.0% is about 75% priced in for September and becomes fully priced in for December. The odds of another 25 bp hike after that top out near 75% in June 2024.
Bank of Japan releases its Q2 Tankan report Monday. Large manufacturing index is expected at 3 vs. 1 in Q1, while large manufacturing outlook is expected at 4 vs. 3 in Q1. Elsewhere, large non-manufacturing index is expected at 22 vs. 20 in Q1, while large non-manufacturing outlook is expected at 21 vs. 15 in Q1. Like the rest of the world, Japan is experiencing increasing divergences between weak manufacturing and strong services activity.
Other key data will be reported. Final June manufacturing PMI will be reported Monday and final services and composite PMIs will be reported Wednesday. May cash earnings data Friday will be closely watched. Nominal earnings are expected at 1.2% y/y vs. 0.8% in April, while real earnings are expected at -2.7% y/y vs. -3.2% in April. The Bank of Japan has stressed that solid real wage gains are a big part of its decision to eventually removed accommodation but so far, wages haven’t cooperating as high inflation has eaten into real earnings. WIRP suggests odds of liftoff are only around 15% for the July 27-28 BOJ meeting and rise to only 55% in December.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 4.10%. However, the market is split as nearly half the analysts polled by Bloomberg see a 25 bp hike to 4.35%. WIRP suggests only 30% odds of a hike this week but is fully priced in for August 1. Looking ahead, odds of another 25 bp hike after that top out near 80% in December. Recall that after pausing in April, the bank delivered back to back hawkish surprises in May and June with 25 bp hikes at both meetings. The bank noted in June that “The board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment.” Looking ahead, it warned that “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe. But that will depend upon how the economy and inflation evolve.” Updated macro forecasts won’t come until the August 1 meeting.
Australia reports some key data too. Final June manufacturing PMI will be reported Monday and final services and composite PMIs will be reported Wednesday. May home loans and building approvals will also be reported Monday. May trade data will be reported Thursday. Imports have been picking up due to strong consumption but exports have been slowing due to the weak mainland economy. These trends should continue in H2.